MAF253 FA JULY2021

PART A

1. All of the followings are related to decision functions of financial management EXCEPT

A. Asset management decisions

B. Financing decision
C. Monitoring decision
D. Investment decision

2. Which of this statement is FALSE regarding maximization of shareholders’ wealth?

A. It involves company’s long-term goals.

B. It ignores risk and uncertainty.
C. It focuses on maximising market price of stock.
D. It considers returns.

3. The most important goal of a company is to _______.

A. increase the market price of the company's ordinary shares.

B. reduce costs and expenses.
C. increase profits.
D. increase sales revenues.

4. Which of the following is generally under the control of the financial manager?

A. The actual level of sales.

B. The percentage of cash and credit sales.
C. The credit policies.
D. Bank's interest rate.

5. The _______ is created by a financial relationship between suppliers and usersof short-term
funds.

A. financial market
B. money market
C. stock market
D. capital market

6. Which of the following would be part of a financial manager's investment decision?

A. Spending money on capital expenditure.

B. Raising money using equity finance.
C. Spending money on revenue expenditure.
D. Borrowing funds.

7. Which of the followings is NOT the party involved in financial environment?

A. Financial managers
B. Financial markets
C. Financial users
D. Financial institutions

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8. What is the main criticism in using shareholder’s wealth as the best criterion in evaluating
the performance of a financial manager?

A. It does not take into account the shareholder's exposure to financial risk.
B. It does not take into account the size of the shareholder’s investment.
C. Maximizing profits is a more suitable criterion.
D. Share market prices can be manipulated in the short term.

9. Which statement is TRUE to explain systematic risk in market?

A. Investors are able to reduce the risk through well-diversification of portfolio.

B. Risks are resulted from forces outside the firm’s control.
C. The impact of risk factors are only to the individual firm.
D. The management level is able to eliminate the risk with proper decisionmaking.

10. If a project has a higher standard deviation compared to another project,

A. it has more possible outcome.

B. it has a greater risk.
C. it has a higher expected return.
D. it may be riskier but this can only be determined by the coefficient of variation.

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QUESTION 1

a. Compute the following ratios:

CA
i. Current ratio = 940,000 / 726,000 = 1.29 times
CL
CA − Inventory − Prepayments
ii. Quick ratio = (940,000 – 240,000) / 726,000 = 0.96 times
CL
Inventory COGS
iii. = 1,076,000 / 240,000 = 4.48 times
turnover Closing Inventory
Average Accounts receivable
iv. × 360 = (680,000 / 1,380,000) x 360 = 177 days
collection period Net credit sales
Fixed asset Net sales
v. = 1,380,000 / 506,000 = 2.73 times
turnover Net Fixed assets
Return on NPAT
vi. × 100 = (70,500 / 1,446,000) x 100 = 4.88%
assets Total assets
Total liabilities
vii. Debt ratio × 100 = [(280,000 + 726,000) / 1,446,000] x 100 = 69.57%
Total assets
Times interest EBIT
viii. = 154,000 / 60,000 = 2.57 times
earned Interest
Gross profit Gross profit
ix. × 100 = (304,000 / 1,380,000) x 100 = 22.03%
margin Net sales
Net profit NPAT
x. × 100 = (70,500 / 1,380,000) x 100 = 5.11%
margin Net sales

b. Comment on company’s liquidity and debt management

Liquidity
Kashfi Sdn Bhd Industry average
Current ratio 1.29 times 3.20 times
Quick ratio 0.96 times 2.50 times

The current ratio is lower than the industry average which reflect than the company has lower ability
to pay its short-term obligation.
The quick ratio of less than 1 and lower than the industry average also indicate that the company is
not able to pay its short-term obligation using its liquid current assets.
Overall, the liquidity position of the company is poorer than the industry average.
This can be due to the company holds too much inventory and has poor cash management.

Debt management
Kashfi Sdn Bhd Industry average
Debt ratio 69.57% 25%
Times interest earned 2.57 times 2.88 times

The debt ratio is higher than the industry average which reflect than the company uses more
borrowings to finance its assets.
The times interest earned is lower than the industry average indicating that the company has lower
ability to fulfils its interest obligation.
Overall, the debt management of the company is poorer than the industry average.
This can be due to the company borrows more than necessary which can lead to higher risk of not
being able to pay its debts.

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QUESTION 2

A. a. TCA (650,000) < TSF (1,050,000)

The company is adopting Aggressive strategy.

b. The company adopts Aggressive strategy which use more temporary source of financing.
This will lead to lower liquidity and resulted in higher risk of illiquidity.
However, the interest on temporary source of financing is lower and resulted in higher return.

B. a.
Inventory 45,000
ICP = × 360 = × 360 = 60 days
COGS 270,000

Account receivable 22,500 22,500

ACP = × 360 = × 360 = × 360 = 45 days
Credit sales 40% x 450,000 180,000

Account payable 41,250

APP = × 360 = × 360 = 55 days
COGS 270,000

CCC = ICP + ACP − APP = 60 + 45 − 55 = 50 days

b. New OC = (ICP + ACP) – 4 = (60 + 45) – 4 = 101 days

New APP = APP + 7 = 55 + 7 = 62

New CCC = New OC – New APP = 101 – 62 = 39 days

c. Daily expenditure = 5,400,000 / 360 = 15,000

Annual savings = Daily expenditure x Reduction in CCC x Interest

= 15,000 x (50 – 39) x 12%
= 15,000 x 11 x 12%
= RM19,800

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C. a. Option 1: Summit Bank

B = 250,000
t = 90 days
i = 12% (DIR)
NCB = 20% x B = 20% x 250,000 = 50,000
OCB = 20,000  insufficient

R = B – Interest – CB
= B – 0.12B(90/360) – (50,000 - 20,000)
= 250,000 – 7,500 – 30,000
= 212,500

Interest 360 7,500 360

EAR = × = × = 14.42%
R t 212,500 90

Option 2: Berjaya Bank

Amount used, B = 250,000
t = 90 days
LOC = 300,000
i = 9%
CF = 4%
Unused portion = 300,000 – 250,000 = 50,000

90
Interest + CF 360 (9% × 250,000 × 360) + (4% × 50,000) 360
EAR = × = ×
Amount used t 250,000 90

5,625 + 2,000 360

= × = 12.20%
250,000 90

0.04 360
𝑘𝑑 = × = 20.00%
1 − 0.04 90 − 15

b. Harrazi Sdn Bhd should TAKE THE CASH DISCOUNT and use the Line of Credit offered by
Berjaya Bank to pay its supplier because the cost of borrowing (12.20%) is lower than the cost
of forgoing the discount (20.00%).

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QUESTION 3

A. Compare the PV of all options and choose the highest one

Option 1
PV = FV2 x PVIF12%,2
= 28,500 x 0.7972
= RM22,720.20

Option 2
PV = FV9 x PVIF12%,9
= 54,000 x 0.3606
= RM19,472.40

Option 3
PV = FV20 x PVIF12%,20
= 160,000 x 0.1037
= RM16,592

Encik Khairul should choose Option 1 since the present value is the highest.

B. PV = 220,000

a. i. Price of apartment in 5 years at 4% inflation rate per year

FV5 = PV x FVIF4%,5
= 220,000 x 1.2167
= RM267,674

Price of apartment in 5 years at 6% inflation rate per year

FV5 = PV x FVIF6%,5
= 220,000 x 1.3382
= RM294,404

b. Annual deposit if price of apartment increases by 6%

FVA5 = PMT x FVIFA12%,5

294,404 = PMT x 6.3528
PMT = 294,404 / 6.3528
= RM46,342.40

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C. a. Expected return and standard deviation for each project

Gold Project
𝑷𝒊 𝑹𝒊 𝑷𝒊 × 𝑹𝒊 ̅ )𝟐 × 𝑷𝒊
(𝑹𝒊 − 𝑿
0.5 14% 7% (14% – 12%)² x 0.5 = 2%
0.4 10% 4% (10% – 12%)² x 0.4 = 1.6%
0.1 10% 1% (10% – 12%)² x 0.1 = 0.4%
̅ = 12%
𝑿 𝝈𝟐 = 4%

Standard deviation, σ = √σ2 = √4% = 𝟐%

Silver Project
𝑷𝒊 𝑹𝒊 𝑷𝒊 × 𝑹𝒊 ̅ )𝟐 × 𝑷𝒊
(𝑹𝒊 − 𝑿
0.5 20% 10% (20% – 15.2%)² x 0.5 = 11.52%
0.4 15% 6% (15% – 15.2%)² x 0.4 = 0.016%
0.1 -8% 0.8% (-8% – 15.2%)² x 0.1 = 53.824%
̅ = 15.2%
𝑿 𝝈𝟐 = 65.36%

Standard deviation, σ = √σ2 = √65.36% = 𝟖. 𝟎𝟖%

b. Coefficient of variation

Gold Project
σ 2%
Coefficient of variation = = = 0.1667
̅ 12%
X

Silver Project
σ 8.08%
Coefficient of variation = = = 0.5316
̅ 15.2%
X

NAR Sdn Bhd, an averse investor, should choose Gold Project since the risk reflected by the
coefficient of variation is lower.

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QUESTION 4

A. PURE LIVING Bhd is currently using a semi-automatic packaging machine to pack their food
products.

This machine was bought 4 years ago at a cost of RM250,000 and is depreciated at 10% per annum
on a straight-line basis for 10 years. The old machine has another 6 years of useful life

There is no salvage value for this machine and it can be sold now at RM160,000. Sales proceeds of
old asset

The firm is considering replacing the existing machine with a new fully automated machine which will
cost the company RM400,000. Purchase price of new asset

The company has to incur another RM25,000 for installation and delivery charges. Cost incurred in
bringing the new asset into use

The new machine has an estimated life of 6 years and a salvage value of RM5,000 (Terminal cash
flow). The depreciation on the machine is charged based on straight line basis.

Since this machine can be operated independently, the company is able to increase its sales by
RM30,000 for the first 3 years and an additional of RM10,000 for the remaining years. Increase in
revenues

On the other hand, the annual cost of maintenance and defects will be reduced by RM15,000 and
RM7,500, respectively. Decrease in expenses

Overhead cost is estimated to increase by RM500 per month (500 x 12 = 6,000). Increase in expenses

Investment in raw materials and work-in-process inventories would increase by RM10,000. Increase
in CA

The company’s maximum acceptable payback period is 5 years. Decision criteria for Payback period

The corporate tax is 25% and the company’s required rate of return is 12%.

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a. i. Initial outlay
RM RM
Cash outflow
Purchase price of new asset 400,000
Add: Installation and delivery charges 25,000
425,000

Add: Working capital requirement

Increase in raw materials and work-in-process inventories 10,000

Less: Cash inflow

Sales proceeds of old asset (160,000)
Tax loss on disposal* 2,500 (157,500)
Initial outlay 277,500

*Workings:

Depreciation on old machine = 250,000 x 10% = 25,000

Depreciation on new machine = (425,000 – 5,000) / 6 = 70,000
Increase in depreciation from Year 1 – 6 = 45,000 (70,000 – 25,000)

Profit/(Loss) on disposal = Sales proceeds of old asset – NBV of old asset

= Sales proceeds of old asset – (Cost of old asset – Acc. Dep. of old asset)
= 160,000 – [250,000 – (25,000 x 4)]
= 160,000 – (250,000 – 100,000)
= 160,000 – 150,000
= 10,000
Tax loss on disposal = 25% x 10,000
= 2,500

ii. Differential cash flows

Year 1 - 3 Year 4 - 6
RM RM RM RM
Savings
Increase in sales 30,000 40,000
Decrease in maintenance cost 15,000 15,000
Decrease in defect cost 7,500 7,500
52,500 62,500
Less: Costs
Increase in overhead cost (6,000) (6,000)
Increase in depreciation (45,000) (51,000) (45,000) (51,000)
Net income before tax 1,500 11,500
Less: Tax (375) (2,875)
Net income after tax 1,125 8,625
Add: Increase in depreciation 45,000 45,000
After-tax differential cash flows 46,125 53,625

iii. Terminal cash flow

RM
Salvage value of new asset 5,000
Add: Increase in raw materials and work-in-process inventories 10,000
Terminal cash flow 15,000
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b.
Year Annual cash flows Accumulated CF
1 46,125 46,125
2 46,125 92,250
3 46,125 138,375
4 53,625 192,000
5 53,625 245,625
6 (53,625 + 15,000)
68,625

277,500 − 245,625 31,875

Payback period = 5 + =5+ = 5.46 years
68,625 68,625

Year Cash Flow PVIF@12% PV

0 (277,500) 1.0000 (277,500)
1-3 46,125 2.4018 110,783.03
(3.6048 – 2.4018)
4-5 53,625 1.2030 64,510.88
6 68,625 0.5066 34,765.43
NPV (67,440.66)

c. The company SHOULD NOT REPLACE the machine since the NPV is negative and the
payback period is more than 5 years.

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B. Woods Creative Sdn Bhd is in the process of introducing a new product line which will require an
initial investment of RM140,000. Year 0 Initial investment

The forecasted sales for the first two years will be RM130,000 per annum. Year 1 – 2 Sales 130,000

The estimated relevant variable costs are RM30,000 for the first year and RM35,000 for the second
year. Year 1 VC 30,000, Year 2 VC 35,000

The company’s cost of capital is 12%. As a newly appointed Finance Officer, you are required to
analyse whether the changes in the project variables will affect its net present value.

a. Sensitivity analysis

Year 0 1 2
Initial investment (140,000) - -
Sales - 130,000 130,000
Variable costs - (30,000) (35,000)
Total cash flows (140,000) 100,000 95,000
PVIF@12% 1.0000 0.8929 0.7972
PV of cash flows (140,000) 89,290 75,734
NPV 25,024

Year 0 1 2
Variable costs - (30,000) (35,000)
PVIF@12% 1.0000 0.8929 0.7972
PV of cash flows - (26,787) (27,902)
PV of VC (54,689)

Year 0 1 2
Sales - 130,000 130,000
PVIF@12% 1.0000 0.8929 0.7972
PV of cash flows - 116,077 103,636
PV of Sales 219,713

i. Initial investment
ii. Variable costs of project
iii. Sales of project

NPV
Sensitivity margin = × 100
𝑃𝑉 𝑜𝑓 𝑣𝑎𝑟𝑖𝑎𝑏𝑙𝑒

Variables Sensitivity margin (b) Explanation

25,024 Initial investment will need to
Initial investment SM = × 100 = 17.87% increase by 17.87% for the NPV
140,000 to be negative.

25,024 Variable cost will need to

Variable costs SM = × 100 = 45.76% increase by 45.76% for the NPV
54,689 to be negative.

25,024 Sales will need to decrease by

Sales SM = × 100 = 11.39% 11.39% for the NPV to be
219,713 negative.

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